S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) lithium shares have been in a progressive downtrend since 2018. The sector is, however, showing signs of life with the Galaxy Resources Limited (ASX: GXY), Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS) share prices all up more than 40% since July. Could this be another one of those disappointing lithium rallies or could they be the next ASX shares to buy?
Different rally, same story?
Many ASX lithium shares have more than halved in value since the industry’s peak in 2018. Their fall from grace was driven by increasing concerns of a saturated market, weak consumer demand and a tumbling lithium spot price. ASX lithium shares experienced similar rallies to what we’ve seen recently back in early January and mid May of 2020. Following these sharp share price spikes, however, lithium miners got back to doing what they seem to do best – trending lower.
Lithium is indeed a very exciting space that’s linked to renewable energy, lithium-ion batteries and, of course, electric vehicles. It’s this excitement that could drive short-term share price increases. However, the ultimate determinant of medium to long-term value is the lithium spot price. This is no different than the importance of the iron ore prices for ASX shares such as BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).
Weak lithium demand
In the Galaxy Resources June quarterly activities report, the company highlighted that the lithium market continues to experience weak demand across the entire lithium value chain. Furthermore, Galaxy Resources advised that the full impact of COVID-19 on sales remains uncertain. Looking over at the Orocobre June quarterly report, the company’s cash costs for the quarter were at a three-year low of US$3,920 per tonne and down 13% on the prior corresponding period (PCP). This signals the company’s focus on efficiency and a reduction of fixed costs. However, the average price received had fallen 19% quarter-on-quarter and 52% on PCP to US$3,920 per tonne. Despite a reduction of costs, the company is selling its lithium at breakeven. Orocobre did comment that the medium to long-term outlook remains positive and continues to be further reinforced with increasing government regulation and funding. Notwithstanding weak spot prices, I believe ASX lithium miners are well capitalised to survive. Galaxy was debt free with cash and financial assets of US$108.6 million and Orocobre had available cash of US$154.9 million as at 30 June.
I believe there will be a turning point for this industry in the future. However, until spot prices start improving and demand picks up there are more reliable and consistent ASX growth shares to buy.